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Mining services a taste of things to come

MARK BANNERMAN: Australia's resources sector took another hit today. The Reserve Bank has warned the future of companies servicing Australia's mining sector is uncertain. The bank says profits have already declined sharply, and there's more bad news to come. The experts say the decline of the sector has serious implications for the economy.

Here's finance reporter David Taylor.

DAVID TAYLOR: It won't go away. In its most recent Financial Stability Review, the Reserve Bank says global financial conditions have improved significantly. But the governor's conceded, the recent lift in economic and financial market conditions may be short lived.

The review issued by the bank says it's too early to say whether the improved market sentiment over the past six months is the beginning of a sustained recovery. The problem is Australia's resources sector and more specifically, the threat to mining services companies. As part of the review the bank said:

(Extract from Reserve Bank of Australia statement)

VOICEOVER: Earnings of the listed mining sector have declined sharply, and the scaling back of planned investment expenditure by the sector, has reduced actual and expected earnings of listed mining services companies.

DAVID TAYLOR: Global investment giant UBS says it's the companies servicing the explorers that are right in the firing line.

Scott Haslem is a senior economist.

SCOTT HASLEM: I think if you're in the exploration area of the mining services industry then it would seem very likely that you're going to face a significant drop in activity on a two to five year view.

DAVID TAYLOR: Roger McGregor has already seen a drop-off in business. He's the Queensland regional manager of Valley Longwall International. Among other things, his company manufactures and supplies drilling machines. He says he's doing it tough.

ROGER MCGREGOR: Over the past 12 months from a revenue perspective the business - our business - would be down somewhere in the order of 30 per cent.

DAVID TAYLOR: And why is that?

ROGER MCGREGOR: I guess the big portion would be a slowdown, well a stop in new projects.

DAVID TAYLOR: And is that related to the mining sector experiencing difficulties?

ROGER MCGREGOR: Yes.

DAVID TAYLOR: What's the outlook for your business?

ROGER MCGREGOR: I guess its ahh, two parts to the business. One is new projects and the other is maintenance so yes things are little bit harder without the new projects coming online - we're more in a maintenance phase.

DAVID TAYLOR: Are you going to have to lay off staff?

ROGER MCGREGOR: Yes, have done and there's potentially more to come.

DAVID TAYLOR: Scott Haslem again.

SCOTT HASLEM: Well clearly there'll be a reduction in the demand for jobs in those areas but of course these areas have taken away jobs from plenty of other parts of the economy from construction and housing and those more domestic, cyclical parts of the economy. So you'd expect to see labour moving back out of these mining services areas, back into more traditional parts of the economy.

DAVID TAYLOR: But one international expert paints a different picture for Australia's economic outlook, a much more challenging one.

Michael Pettis is a Wall Street veteran, finance professor and entrepreneur. He's now based at the Peking University but he recently spoke with the ABC's 'The Business', he says the mining sector and related industries are heading into an extremely difficult phase.

MICHAEL PETTIS: First of all investment growth will slow down significantly and maybe even go negative which means that China which is a disproportionately large source of demand for hard commodities, 60 per cent of iron ore, 40 per cent of global copper et cetera, that demand is going to go down significantly, that will hurt the commodity exporting sector which is unfortunately very important in Australia.

DAVID TAYLOR: The RBA maintains its line that Australia's construction sector has most of the burden to carry in terms of maintaining trend levels of growth.